| Debt | Note 5 – Debt The table below details the Company’s debt balance at March 31, 2019 and December 31, 2018 (in thousands):
March 31, 2019
December 31, 2018
Term loan- secured
$
125,000
$
125,000
Revolving credit facility- secured
160,100
153,800
Unamortized deferred financing costs
(547
)
(663
)
$
284,553
$
278,137
The Company’s Second Amended and Restated Credit Agreement (as amended, the “Credit Agreement”) provides for a $300 million revolving credit facility that matures in February 2021 and a $125 million term loan that matures in February 2022. The revolving credit facility has one 12-month extension option, subject to certain conditions, including the payment of a 0.15% extension fee. At March 31, 2019 and 2018, the weighted-average interest rate under the Credit Agreement was 5.0% and 3.8%, respectively. Total costs related to the revolving credit facility at March 31, 2019 were $1.4 million, gross ($1.3 million, net), of which $0.4 million, gross ($0.3 million, net) are related to the Third Amendment to the Credit Agreement entered into on February 20, 2019 (the “Third Amendment”) and the Second Amendment entered into on October 9, 2018 (the “Second Amendment” and, together with the Third Amendment, the “Credit Amendments”). These costs are included in Other assets, net on the consolidated balance sheet at March 31, 2019 and will be amortized to interest expense through February 2021, the maturity date of the revolving credit facility, and June 30, 2019, the date the extended borrowing base availability provisions expire under the Credit Amendments. The total amount of deferred financing costs associated with the term loan at March 31, 2019 was $1.0 million, gross ($0.5 million, net), of which $0.2 million, gross ($0.1 million, net) are related to the Credit Amendments. These costs are netted against the balance outstanding under the term loan on the Company’s consolidated balance sheet and will be amortized to interest expense through February 2022, the maturity date of the term loan, and June 30, 2019. The Company recognized amortization expense of deferred financing costs, included in interest expense on the consolidated statements of operations, of $1.4 million and $0.3 million for the three months ended March 31, 2019 and 2018, respectively. The amortization expense for the three months ended March 31, 2019 includes approximately $0.9 million for the write-off of unamortized deferred financing costs related to the reduction in total commitments under the Credit Agreement included as part of the Third Amendment to the Credit Agreement. The Third Amendment amended certain terms, covenants and conditions of the Credit Agreement and the Second Amendment including, but not limited to the following:
•
Retained the increase in the applicable margin included in the Second Amendment of 2.00% and 3.50% for LIBOR-rate loans and 1.00% and 2.50% for base-rent loans, depending on the Company’s leverage ratio (prior to the Second Amendment, the applicable margin was 1.75% to 3.00% for LIBOR-rate loans and 0.75% to 2.00% for base-rate loans, depending on the Company’s leverage ratio);
•
Temporarily increased the borrowing base availability attributable to the Company’s borrowing base assets, other than the Texas Ten Portfolio, until June 30, 2019;
•
Restricts the Company’s use of proceeds from borrowing under the Credit Agreement solely for the remaining funding obligations for the expansion of the Mountain’s Edge Hospital and the Company’s construction mortgage loan to Haven Healthcare, unless approved by lenders representing two-thirds of the outstanding commitments under the Credit Agreement.
•
Reduced the maximum amount available under the revolving credit facility from $300 million to $175 million, which, when combined with the $125 million term loan, provides total commitments available to the Company under the Credit Agreement of $300 million;
•
Required any principal repayment on the Medistar Gemini Mortgage Loan and Medistar Stockton Loan to be used to pay down the outstanding balance on the revolving credit facility; and
•
Prohibits the Company from declaring any dividend on or prior to June 30, 2019, other than, subject to certain conditions, (i) a dividend to our common stockholders attributable to the fourth quarter of 2018 not to exceed $0.21 per share, with payment conditioned upon approval by our stockholders of the merger with Omega and subject to the Company maintaining a minimum of $2.0 million in unrestricted cash and cash equivalents upon payment of such dividend, and (ii) the closing dividend pursuant to the terms of the merger agreement with Omega. At May 8, 2019, the Company had $285.1 million in borrowings outstanding, of which $160.1 million was outstanding under the revolving credit facility with a weighted-average interest rate of 5.2%, Management’s Assessment of Future Borrowing Base Availability and Future Plans All the Company’s outstanding borrowings under the Credit Agreement will be repaid upon closing of the announced merger with Omega, as discussed in further detail in Note 3. In the event the merger is delayed or does not close as anticipated, the additional borrowing base availability and borrowings provided by the Credit Agreement, along with the Company’s current cash on hand and expected monthly net cash flows, are projected to provide sufficient liquidity to the Company to satisfy outstanding funding obligations, comprised primarily of the Haven construction mortgage loan and Mountain’s Edge construction project; ongoing operating expenses, including interest payments under the Credit Agreement; and required distributions to stockholders to satisfy REIT requirements through May 2020. Upon expiration of the extension of the borrowing base availability included in the Third Credit Amendment through June 30, 2019, the Company expects its unrestricted cash and cash equivalents on hand would be sufficient to pay down the approximately $15.1 million in excess borrowings over the estimated borrowing base availability at that date. If the Company’s unrestricted cash and cash equivalents as of July 1, 2019 are not sufficient to cover any borrowings under the Credit Agreement that exceed borrowing base availability, and the Company’s merger with Omega has not yet occurred, management would seek an additional modification of its Credit Agreement to remedy the over-advanced position, which may include, but is not limited to, granting the lenders a first mortgage interest in its real estate portfolio in order to secure all amounts outstanding under the Credit Agreement. Based upon preliminary discussions with the lead agent under the Credit Agreement, management believes that a conversion to a mortgaged-back facility is executable and the value of the Company’s real estate investments is sufficient to cover amounts outstanding on the facility. Interest Rate Swap Agreements To mitigate exposure to interest rate risk, on February 10, 2017, the Company entered into four interest rate swap agreements, effective April 10, 2017, on the full $125 million term loan to fix the variable LIBOR interest rate at 1.84%, plus the LIBOR spread under the Credit Agreement, which was The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. The changes in the fair value of derivatives designated and that qualify as cash flow hedges are recorded in Accumulated other comprehensive income. Those amounts reported in Accumulated other comprehensive income related to these interest rate swaps will be reclassified to Interest expense as interest payments are made on the Company’s variable-rate debt. During the next 12 months, the Company estimates that an additional $0.7 million will be reclassified from Other comprehensive income as a decrease to Interest expense. The fair value of the Company’s derivative financial instruments at March 31, 2019 and December 31, 2018 was an asset of $ 1.1 The table below details the location in the consolidated financial statements of the gain (loss) recognized on interest rate derivatives designated as cash flow hedges for the three months ended March 31, 2019 and 2018 (dollars in thousands):
Three Months Ended March 31,
2019
2018
Amount of gain (loss) recognized in other comprehensive income
$
(859
)
$
1,709
Amount of gain (loss) reclassified from accumulated other comprehensive income into interest expense
205
(78
)
Total change in accumulated other comprehensive income
$
(1,064
)
$
1,787
As of March 31, 2019, the Company did not have any derivatives in a net liability position including accrued interest but excluding any adjustments for nonperformance risk. Covenants The Credit Agreement contains customary financial and operating covenants, including covenants relating to the Company’s total leverage ratio, fixed charge coverage ratio, tangible net worth, maximum distribution/payout ratio and restrictions on recourse debt, secured debt and certain investments. The Credit Agreement also contains customary events of default, in certain cases subject to customary cure periods, including among others, nonpayment of principal or interest, material breach of representations and warranties, and failure to comply with covenants. Any event of default, if not cured or waived, could result in the acceleration of any outstanding indebtedness under the Credit Agreement. The Company was in compliance with all financial covenants as of March 31, 2019. |
